The Impact of Loyalty Schemes on the Retail Segment - Research Paper Example

Do Loyalty schemes have a positive impact on the retail segment (supermarkets) that uses them? Introduction The entire project revolves around the effect of loyalty schemes for customer retention on the retail segment. The project conducts detailed analysis on loyalty schemes proposed by retailers, customer response, cost and benefit analysis of retailer spending on customer loyalty to increase in customer retention facilitating more business expansions. We will also demonstrate a case study on TESCO to substantiate positive outcome on the effect of loyalty schemes on retail segment. Aim of the project To ascertain the loyalty schemes in place. To ascertain the customers reaction to loyalty schemes. To ascertain the true impact of loyalty schemes and their true costs to the organisations that uses them. To ascertain the true benefits of loyalty schemes to organisations that uses them. Customer loyalty – An eye opener Customer loyalty can be defined as the totality of positive attitudes or feelings that would urge a customer to consider the re-purchase of a particular product, service or brand or re-visit a particular company, shop or website. Customer loyalty has always been critical to business expansion, profitability and sustainability of business. Factors determining Customer loyalty There are 3 factors determining the customer loyalty .They are Strength and Intensity of customer relationship Perceived Alternatives designed based on customer feedback Critical episodes which are of prime importance for the customer is the desperate stage. Factors affecting Customer Loyalty Customer moves out of a particular market segment Customer preferences and needs are changed or modified due to external perception Increase competition attracting customers with various avenues and choices to purchase with the internal urge to change and observe In capacitive handling of critical issues making the customer irate and force him to shift his preference of purchase. Ladder of customer loyalty The ladder of customer loyalty explains about the different types of customers the company encounters. The aim of customer loyalty is to retain customers, as it can cost a company anything as up to six times as much to attract new customers. There are five steps in this ladder listed below Suspect A suspect is someone who comes across your companies’ promotion and has a reluctance to take the next step. They are a potential suspect for your company. Prospect If the person is interested in your promotion and eager to visit to review your company, they become a potential prospect. Customers A customer is the person purchasing a commodity and starts a relationship with the company and uses its product over a period of time. Clients Clients are those repeat customers having a quest for a long lasting relationship with the company . Advocates Act a business promoter and advertises through word of mouth by reiterating memorable experiences with the company. Advocates act as patron to improve customer service and they influence increase in sales and overall business.  Diagram: Ladder of Customer Loyalty http://www.indianmba.com/Faculty_Column/FC807/fc807.html   You can see from the ladder a company should hope to retain customers to the extent that systems in place help promote the customer to advocate level. It makes sense for the company on spending money to retain customers and keeping them happy so they can become advocates for you, therefore bringing in the business on your behalf Literature review on Customer Loyalty The Literature review enlightens us on the background research and various theories related to customer loyalty and provide an insight on the parameters which are responsible for gauging the effectiveness. We define improvements in customer loyalty and customer knowledge as the two key benefits of loyalty programs. Furthermore, we argue that customer knowledge stimulates customer loyalty. “Customer knowledge has been recognized as an important tool to enhance customer loyalty in mass markets” (Coviello et al., 2002 N.E. Coviello, R.J. Brodie, P.J. Danaher and W.J. Johnston, How firms relate to their markets: an empirical examination of contemporary marketing practices, Journal of Marketing 66 (3) (2002), pp. 33–46. Full Text via CrossRef | View Record in Scopus | Cited By in Scopus (66)Coviello et al., 2002). When a retailer knows his customers on a segment or even individual level he can provide better customer value and develop stronger customer relationships. The marketing literature provides a wide range of loyalty measures (Odin, Odin, 2001), and their usefulness depends on the specific market and study objective. The main distinction in loyalty measures is between attitudinal loyalty and behavioural loyalty (Dick & Basu, 1994). Since we are interested in the effects of loyalty programs on actual purchase behaviour, our key dependent variable captures behavioural loyalty. In grocery retailing, purchase behaviour is characterized by high buying frequency and variation in basket sizes (Kahn & Schmittlein, 1992). Further, consumers are often regular buyers at different companies (Kahn & McAlister, 1997), a phenomenon referred to as polygamous loyalty (Dowling & Uncles, 1997). Given these characteristics, share-of-wallet is the most suitable measure for behavioural loyalty (Berger et al., 2002) Mägi, 2003 A.W. Mägi, Share of wallet in retailing: The effects of customer satisfaction, loyalty cards and shopper characteristics, Journal of Retailing 109 (2003) (2), pp. 1–11.. Share-of-wallet measures the share of category expenditures spent on purchases at a certain company, which integrates choice behaviour and transaction sizes during a certain time period into one single measure. Relationship between Customer Loyalty and Profitability The major assumption in loyalty marketing is that proposed cost restriction of existing customers than acquiring new ones. Reichheld and Sasser projected that only a 5% improvement in customer retention can lead to an increase in profitability between 25% and 85%, and these figures are subject to change depending upon industry sector. Therefore increase in ‘customer loyalty’ leads to increase in profitability and thus has a direct relationship with profitability. The increased profitability associated with customer loyalty occurs because: acquisition costs only occur at the beginning of a relationship, Thus a longevity in relationship leads to lower amortised cost account maintenance costs decline as a percentage of total costs (or as a percentage of revenue) long-term customers tend to be less inclined to switch over to competition , and also tend to be less price sensitive long-term customers may introduce new customers via word of mouth on their personal experiences acting as patrons for the product long-term customers are more likely to purchase add-ons satisfaction breeds habit, meaning that long-term customers are less likely to switch to competitors, it strains the entry of competitors in to the respective domain for acquiring more market share long-term customers are less expensive to service because they are familiar with the process and require less active familiarisation loyal customers are more consistent in their buying behaviour high levels of repeat customers makes employees jobs easier, which feeds back into improved customer service All the above factual statements justifies that customer loyalty is directly proportional to profitability. It is also important that marketing departments assess as the details of the profitability of each customer or business segment, whether in a business-to-consumer (B2C) or business-to-business (B2B) context. Analysing customer relationship costs with revenue can demonstrate this and it is best business practice to terminate those relationships, which are found not to be profitable. Proven methods to gauge customer loyalty and competitive advantage According to Proctor (2000), the concept of competitive edge is important since it influences the success of a business venture to a greater extent. Proctor reiterated that competition not only involves production and distribution of products but also focuses on the level of customer satisfaction and retention achieved by addressing the needs of the customer. Effective Market Positioning, choice of target base, promotional activities will enable the company to sustain in business arena.  Therefore, it is very critical to get an insight on the factors influencing the customer perception with respect to the company’s products and services. One of the proven methods to identify the critical facts is to implement a PEST analysis. PEST stands for political, economic, socio-cultural and technological forces. These factors affect business to a greater extent through the customers and are highly reliable in shaping up the perception of the customer and create an influential increase in the purchasing power of the target customer base. Competitive analysis can be effectively done using Porter’s Five Force and SWOT analysis to understand the competition. The objective of the SWOT analysis is to determine the presence of factors favouring the business in achieving its goals as well as factors hampering its improvement in both internal and external environment. By doing the SWOT analysis, the company will be able to analyze the pros and cons of the existing system by matching their resources and competencies in a competitive scenario.   On the other hand, Porter’s Five Forces Model states that strategic planning in business is influenced by five coercive forces namely power of supplier, threat of substitutes, buyer power, barriers to entry and rivalry. This model also provides more insight on the relevance of business approach and the marketing concepts adopted for feasible operation. Porter’s five principles determine the competition level and also identify the occurrence of potential threats proactively like discounting a customer or change in customer preferences or loyalty for planning effective contingency management. Recommended practices to achieve Customer Loyalty The references from various customer retention strategy sources reveal certain important recommendations for retailers in order to retain the customers. The specific recommendations are listed below. It is advisable to use carrot as approach rather than sticks to encourage more sustainability in the market scenario. It is very important to influence the purchasing power of the customers by using powerful strategies involving mass dynamic change and build the building blocks of customer loyalty Educate consumers on the availability of various options through effective communication channels and ensure that there is simplicity in the communication and it is wise to use visual media for more clarity on the message. The prime objective of the retail chain is to ensure consistency in performance and deliver goods and services on time with a quest for customer satisfaction Help people by providing them with the information they need to encourage ‘green’ behaviours which greatly influence customer satisfaction: To devise strategy on customer retention considering the nature of model and desired brand and deciding on appropriate promotional activities influencing customer interest and loyalty towards the retail segment The primary focus of the retail segment is to engage, communicate and demonstrate key customer objectives which are planned by the customer A significant change can be brought in the retail segment by working together and also based on collaboration between retailers themselves and other key stakeholders (like sustainability experts, government and the media) .These retailer act as the key determinant for establishing a change. Loyalty Schemes http://www.marketingdonut.co.uk/marketing/customer-care/loyalty-schemes Customer loyalty schemes are proven effective methods to scale up the customer-retention levels. The high cost of introducing a new business compared to retaining existing clients is undisputed so increasing your customer retention can show a remarkable increase in the bottom-line profits. In a competitive marketplace where customers are having diverse options to switch supplier, loyalty schemes are stress belts acting in an effective way to increase customer retention and improve profitability of the company. A word of caution is that the fact that your customers are satisfied will not stop them from looking for more options through loyalty shift to a competitor who offers them something extra for customer attraction. To increase loyalty, you need to recognize and reward your best customers. A loyalty scheme can be promoted by giving incentives and delighting the your most valued customers. These loyalty programs boost the profitability of the company. The advantages of loyalty schemes Loyalty initiatives allow you to focus on your best customers. These customers buy more and are often willing to pay more, which increases the cash flow reserve. By increasing loyalty, you can increase profitability and extend the time they place their business with you. These strategies contribute to the longevity of customers for a specific product or a retail store Loyal customers are also good for your business because they become your best advocates. They recommend you to others, saving you marketing costs. A loyal customers endorsement is more powerful to their friends and family than any advertising campaign. Devising the right loyalty scheme Customers like loyalty schemes because they feel they are getting rewarded for giving you their business and they regard themselves as key patrons and praisers contributing to the sustainability of business. So the loyalty scheme should focus on critical offerings to the customers which can be important something they will appreciate. In a business perspective ,the loyalty schemes should be associated with profit in mind to balance the cost spend on customer retention and the increase in profitability and percentage of new customers. It is of prime importance that loyalty schemes are trying to reward customers for behaving in the desired manner matching the expectations and decorum of the retail store. So ardent focus on specific goals and correlating them with the customer perception will help in effective loyalty management strategies The rewards you offer to regular customers can vary from fixed discounts to extra goods or prizes. Above all, the scheme should be simple to use and the rewards should be attractive and attainable. If customers have to spend a lot to get a small gift, they will be insulted. At the same time, make sure you can recover the cost reasonably quickly. Customer Loyalty schemes must be designed using SMART technique Specific: Focusing on specific market segment, product line which needs more focus on customer loyalty Measurable The outcome of the schemes should be transcended to cost benefit analysis relating customer perception and increase in business propositions Attainable The loyalty schemes should involve trait of practicality so that the customers can easily attain the suggested benefits. There should be balance in retail industry offerings and the money spent by customer. Realistic The Customer loyalty schemes are not for brand promotions confined to brochures and not practiced in reality. So Customer Loyalty schemes must be designed with realistic options with more transparency of the process. Loyalty schemes like free trips to Singapore for two by random selection are not realistic schemes. Time bound The customer loyalty schemes should be defined for a specific time frame and the timeline should be communicated to customers well in advance to avoid disappointment. Getting to know your customers The data generated by a loyalty scheme can also be used to improve the bottom line focus areas. Loyalty programme should revolve on customer behaviour as the same is highly unpredictable .Customers can refer best clients or on the contrary highlight worst about the retail store. It can be more profitable to lose customer who feel bad about the retail outlet than to gain new ones. The loyalty scheme should focus on the rewarding customers who are loyal and act as patron influencing new business prospects and actively dissuading the worst. Loyalty schemes can also be used to win back lapsed customers. These customers are much easier to win over than cold prospects. They know you and you know them, their buying history and where and how to reach them. The data generated by a loyalty scheme can offer other valuable insights. It can highlight the areas of improvement aligned with customer expectations and can also help you improve your product range and stock selection. It is critical to know the best customers ,their critical interests on products and also their preference and feedback on the service ,product and quality of the retail chain . Case Study on TESCO Company profile www.transnationale.org/companies/tesco.php TESCO is a known player for grocery multiple chains focusing on organic food sales in UK and Central Europe has a leading stock of about 1000 to 1500 organic lines. TESCO has partnered with many leading suppliers as a measure to increase demand and supply. TESCO has close affiliations with wide range of organizations to improve CR performance, share data, knowledge and ideas and deliver specific programme. They include: British Retail Consortium Business in the Community Cancer Research UK Carbon Disclosure Project The Climate Group Confederation of British Industry Strategic focus of TESCO Important strategy adopted by TESCO is to focus towards higher quality and increasing safe product based on the expected standards set by suppliers. Some of the Key strategies implemented by TESCO in terms of achieving excellence in customer loyalty are To design a baseline method to gain insight on average customer loyalty based on the current scenario. Key observation required for this strategic focus is Examine target customer base and their loyalty percentage Examine and understand the customer loyalty pattern using market segmentation strategy for a more detailed analysis on the strength and weaknesses corresponding to customer loyalty. To analyze on the customer profitability scenarios based on different time lines for better understanding of customer expectations. Some of the key findings include Calculation of the acquisition costs and service costs to calculate the average customer revenue for a given time period. Average customer revenue is calculated by subtracting the acquired cost from the total cost. This will also provide an insight in the time taken for a new customer to emerge as a profitable customer over a period of time. Set a target loyalty rate for effective management of customer satisfaction It is observed that the longer it takes to become profitable, the higher the loyalty rate needs to be. Establishing and monitoring loyalty KPI (to be defined by management) and correlate loyalty directly to business performance. Define methods to review the marketing tactics for improving loyalty If the current loyalty percentage is not satisfactory then the company focused on series of tactics to identify the root cause and implement corrective action. If current loyalty does not comply with the set targets, action plan for improving loyalty as a key business objective should be devised with process owners and review dates for improving customer loyalty. The increase in customer loyalty percentage can be calculated based on the same. Engage a statistician for doing data analysis to and interpret the key factors correlating to long-time customers or customers who attrite. Then, establish effective marketing and customer service practices and campaigns that specifically focus on encouraging the factors that are correlated with long-term customers. It is important to measure the results consistently and accurately.. Re-evaluation of loyalty rate in analyzing the extent of customer loyalty To implement the tactical approach encouraging the metrics to correlate with long term customers. Loyalty programs for customer retention TESCO also focuses on direct strategies with the primary objective on customer retention by promoting customer loyalty schemes attracting more customers to scale up the business prospects. Due to the customer loyalty programs, TESCO has been successful in increasing the Target Customer base, achieving customer reliability and loyalty at a higher degree. Loyalty programs in general perspective To identify the profitable customers and reward them for their loyalty towards TESCO.This practice is one of the best example for acquiring customer relationship management Data mining tools and analytical software to facilitate easy purchasing of the customer by saving time by easy retrieval of customer information to avoid repetition The schematic diagram of entire supply chain management of TESCO Most wanted Loyalty program–TESCO club card program http://www.loyalty.vg/pages/CRM/case_study_14_Tesco.htm TESCO has gained more momentum because of its club card program attracting customers and increasing the chances of customer retention and business enhancement. The Key focus areas for launching the customer club card program are Knowledge and understanding the customer’s and their individual requirements and preferences Relevant communication with customers with more simplicity and ambience. To provide extra ordinary customer satisfaction by managing the offerings so that the customer has a memorable, amicable shopping experience. TESCO decided to introduce a loyalty program based on the key focus areas. As a test run to gauge the momentum of the loyalty program, it decided to run the club card in three stores. In order to get more impressive results, TESCO teamed up with dunnhumby and conducted a test and learn approach in their global chain of 12 stores and then designed the TESCO club card program for profitable customers. Important features of TESCO club card program http://www.tesco.com/todayattesco/index.shtml Pricing: Investments of two billion dollar within 5 years lead to reduction of prices on significant items pertaining to groups belonging to various lifestyles Promotion The promotions are evaluated based on customer insights and minimize the overall costs involved in promotion .The various probing questions generated on the factors listed below can identify the customer insights and information are listed below    Shopper’s usage “Who uses them “ Shopper‘s liking of product “Who likes them”.    Is there any way to focus the promotion to the customers?    How they can take investment from promotions and utilize the same back to the business? The above promotional strategies facilitated 60% of less promotions .reduction in the management cost and re-investment of money for further business prospects facilitating price reduction and have a more effective and tailored promotions. Shared Insight TESCO’s has provided access to customer information which is gained from the club card program to good suppliers, media companies, researchers, space planners etc. Success story of TESCO club card programme TESCO’s Club card program has its widespread reach on 10 million active households and records a sales value of 85% of weekly sales. The success of the loyalty programme is because of the commitment of TESCO to treat customers as individuals focusing on key areas of multidimensional customer segmentation and tailored communications. Customer Segmentation is done on the basis of cost conscious, mid-market purchasing segments, and up-market purchasing segments, which are in turn are segmented again to have options like healthy, gourmet, convenient, family living, and so on. These sub segments are then segmented further and relevant communications are tailored to each. It is found that after the implementation of club card programme, there is 52% increase in sales and growth rate higher than the industry average within a period of 5 years .There is 150% increase in the business expansion and Store openings of TESCO which in turn has increased the number of outlets. Conclusion The project report justifies the fact that there is a positive outcome on customer loyalty programs and it definitely increases the profitability and helps the retail store in the process of business expansion.The case study on TESCO provides a clear cut insight on customer loyalty program ,their need,ways of customer satisfaction and ways for business expansion. References Berman, B. and Evans, J. (2006) Retail management. 10th ed., Prentice Hall. Cox, R. and Brittain, P. (2004) Retailing – an introduction. 5th ed.,Pearson. Dawson, J. (2006) Strategic issues in international retailing.London: Routledge. Dawson, J. (2005) International retailing plans andstrategies in Asia. 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Journals • The Grocer (Compton Library) • Retail Week (Compton Library) e- Journals • European Retail Digest • International Journal of Retail and Distribution Management • International Review of Retail, Distribution and Consumer Research • Journal of retail & leisure property • Journal of retailing • Journal of retailing and consumer services • Retail merchandiser Read More